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This article investigates the effect of the level of institutional development of host countries on the level of and variation in foreign affiliate performance. Institutional development is defined as the extent to which the economic, political, and social institutions in a host country are developed and are favorable for foreign affiliates. A longitudinal analysis of over 30,000 foreign affiliateyear cases that include 6.985 foreign affiliates in 38 host countries between 1996 and 2001 shows that foreign affiliate performance varies noticeably both across and within host countries. The results suggest that the level of institutional development, as determined by the Institutional Development Index (IDI), a new measurement developed in this study, has a strong negative curvilinear relationship with the variation in foreign affiliate performance and a negative effect on the level of foreign affiliate performance. The implications for future research, practice, and policymaking are discussed.

This study examines the extent to which subnational regions can explain foreign affiliate performance in two host country settings, the United States and China, the world's two largest economies at polar ends of the economic spectrum (i. e., an advanced versus an emerging economy). Our results suggest that the subnational region is significant in explaining foreign affiliate performance, thus confirming its importance as an additional unit of analysis for firm performance. This study also shows that the effects of subnational region are far stronger in China than they are in the United States, thus suggesting that regional differences are more critical in their explanatory power for firm performance in emerging economies than they are in advanced economies.

Research summary: Although prior research has suggested that equity ties are important for business groups, less attention has been paid to the specific mechanisms through which equity ties create value. We develop a framework that specifies how centralization of intragroup equity ties affects the performance of group affiliates. We use the exogenous shock of the 2008 financial crisis and a difference-in-differences analysis of 51,730 observations of business group affiliates in Taiwan to show that centralization of equity ties enhances affiliate performance, but such effects weaken when the environment becomes turbulent. Moreover, we find that listed affiliates obtain fewer benefits from centralization than unlisted affiliates. Overall, our study deepens scholarly understanding of not only how groups create value, but also how value is differentially appropriated among affiliates. Managerial summary: Our research speaks directly to owner-managers of business groups with respect to creating an optimal equity network structure that binds the affiliated firms of the group. Our findings suggest to managers that the overall structure of equity ties in a business group has major implications for the performance of the affiliate firms of the group, and the network structure within the group should be designed deliberately and thoughtfully on an on-going basis. In particular, control through centralized equity ties is performance-enhancing in normal periods, but such control may be counterproductive as turbulence increases in business environments, or as the number of listed group firms increases. Hence, owner-managers may consider optimizing the network structure by lowering the degree of centralized equity ties under such circumstances, or at a minimum, lowering centralized control.

Little is known about how the dynamic process of pro-market reforms influences the performance of foreign affiliates in emerging economies and how multinational enterprises (MNEs) can deal with such a dynamic process. This study disentangles the dynamic process of pro-market reforms into three dimensions – speed, (un)predictability, and (un)synchronization – and argues that the performance of foreign affiliates suffers when pro-market reforms are slow, unpredictable, and unsynchronized. To mitigate the detrimental impacts of the three distinctive dimensions of pro-market reforms, MNEs can deploy strategies that allow their foreign affiliates to seek local help from other strongly embedded “central” organizations, subnational help from sister affiliates in other subnational regions of the same host country, and global help from parent firms. To test these arguments, this study performs a 10-year longitudinal analysis of 79,763 foreign affiliates operating in China. The results provide evidence that seeking local help is effective in mitigating the negative effect of slow pro-market reforms on foreign affiliate performance, but has no effect on the unpredictability of pro-market reforms. In addition, subnational help is as effective as global help in mitigating the negative effect of unsynchronized pro-market reforms on foreign affiliate performance.

Previous studies have explored the predictors of business unit performance in multiple-business firms and investigated the extent of the effect of industry, corporate, and business unit on the performance of a business unit. These studies have focused almost exclusively on examining performance differences within a single country, thus treating country effects as external to business unit performance. In contrast, this study focuses on multinational corporations and examines the extent to which country effects explain the variation in the performance of foreign affiliates. Our findings show that country effects are as strong as industry effects, following affiliate effects and corporate effects. Our results also suggest that corporate and affiliate effects tend to be more critical in explaining the variation in foreign affiliate performance in developed countries, whereas country and industry effects are more salient in developing countries.

This study examines the performance impacts of entry mode choice based on the perceptions of managers of a large sample of foreign MNEs in South Korea. Using an extended transaction costs model, an evaluation of performance relative to predicted entry mode is carried out. We find that affiliate performance is a multidimensional and complex phenomenon, which may be properly explained by multiple factors, including the coordination and control of the affiliate by the MNE, that go beyond initial entry mode choices. Foreign MNEs following the entry mode predicted by the extended transaction costs model showed poorer performance than non-followers in respect of non-financial performance. However, no significant differences were found for financial performance. The findings appear to reinforce a recent call to re-examine transaction costs theory and lend further support for incorporating additional potentially important determinants of affiliate performance.

Business groups not only help affiliates circumvent market imperfections, but they also have great influence on the economic development of emerging markets. This study applies three ways to clarify the influence of business-group effects on affiliate performance. First, this study finds that the business group can explain a respectable portion of the variations in affiliate performance. Second, this study examines the impact of family ownership, resource abundance, and resource dispersion on affiliate performance and finds that group size and financial resources positively affect affiliate performance, while family ownership and group diversification do not have a significant effect on affiliate performance. Finally, the magnitude of business-group effects is subject to the ownership and resources of each business group. Family groups, large groups, and highly diversified groups have smaller business-group effects, while groups with high financial resources have greater business-group effects, indicating that business-group effects are heterogeneous and dependent on different group features. This study provides support to the resource-based and the institution-based views of business groups.

Many international business (IB) studies have used foreign direct investment (FDI) stocks to measure the aggregate value-adding activity of multinational enterprises (MNE) affiliates in host countries. We argue that FDI stocks are a biased measure of that activity, because the degree to which they overestimate or underestimate affiliate activity varies systematically with host-country characteristics. First, most FDI into countries that serve as tax havens generate no actual productive activity; thus FDI stocks in such countries overestimate affiliate activity. Second, FDI stocks do not include locally raised external funds, funds widely used in countries with well-developed financial markets or volatile exchange rates, resulting in an underestimation of affiliate activity in such countries. Finally, the extent to which FDI translates into affiliate activity increases with affiliate labor productivity, so in countries where labor is more productive, FDI stocks also result in an underestimation of affiliate activity. We test these hypotheses by first regressing affiliate value-added and affiliate sales on FDI stocks to calculate a country-specific mismatch, and then by regressing this mismatch on a host country's tax haven status, level of financial market development, exchange rate volatility, and affiliate labor productivity. All hypotheses are supported, implying that FDI stocks are a biased measure of MNE affiliate activity, and hence that the results of FDI-data-based studies of such activity need to be reconsidered.

Prior research suggests that business groups (BGs) in developing economies have emerged as alternatives to poorly developed economic institutions in these countries. In this paper, we argue that this does not imply they are always substitutes. Specifically, we consider the case of capital markets, a key economic institution: while the absence of well-developed capital markets may indeed have stimulated the emergence of business groups, we propose that BG affiliation and the scrutiny that maturing capital markets impose on firms that participate actively in them nevertheless can play a complementary role in influencing a firm's performance. We find support for our predictions in a novel longitudinal data set of Indian firms that contain both listed and unlisted BG affiliated as well as unaffiliated firms.